Estate Planning & Living Trusts

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24. Stepped-up basis example

Another problem with giving away assets is that you might be giving the recipient an income tax problem.

Here’s an example. Let’s say Bob bought his home for $100,000 and today it’s worth $350,000. He gives it to his son Tom, who then sells it for $350,000.

Because Bob transferred title to Tom while he was living, the house keeps Bob’s old cost basis of $100,000. Remember, that’s what Bob paid for it.

That means Tom now has a $250,000 gain on the sale. And, under current tax law, he will have to pay at least $50,000 in capital gains tax. He may owe additional surtaxes and state income taxes as well.

Let’s look at what happens if Bob had left his home to Tom as an inheritance through a will or trust.

 

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